2014: Year of Commodities (March)

That 2013 was a year when equities ruled supreme is now well recorded history.
Generally speaking, expectations at the end of the year were that 2014 would
be more of the same. Among the popularly reported forecasts were the S&P
500 going to 2,000 while $Gold would plunge to $1,050. While the calendar will
ultimately decide the wisdom of those forecasts, reality is already casting
doubt on them. Perhaps the numbers in those forecasts were inadvertently switched.

In the above chart are plotted year-to-date returns for some popular investment
strategies. Immediately obvious is that the three components of the commodity
group are all up while equities, depending on the index, are either down or
up only modestly. Also readily apparent is that the Agri-Food Price Index has
risen by the greatest amount, achieving a new all time high as shown below.
Gold followed in second place. Equities follow in clearly fourth place.

These price returns tell us that demand for Gold and Agri-Foods is stronger
than supply. Weak equity prices indicate that supply is in excess of demand.
Quite simply, the supply of equities is excessive and the supply of Gold and
Agri-Foods is inadequate.

That the Agri-Food Price Index is at a new high is made more significant by
pervasiveness of the move in Agri-Commodities thus far this year. As shown
in chart below of year-to-date price changes, 14 of 16, or 98%, of the Agri-Commodities
have experience price increases thus far in 2014. Those price increases range
from +4% for sugar to +60% for hogs. Corn, which some had forecast to trade
at US$2.50, has instead risen by 10% and traded over $5 briefly. Why have the
prices of Agri-Commodities, as well as those of Gold and oil, risen despite
warnings of strong supply? Answer is simple: Demand is stronger than supply.

One perhaps important flaw in the consensus global outlook at turn of the
year was that U.S. economic activity would strengthen while outside the U.S.
it would weaken. The likelihood that this forecast is "upside down" is increasing.
Consumer demand within China, and most of Asia, is strong. For example, milk
prices recently hit an all time high in Chicago. Chinese milk imports during
2013 rose 25% and are expected to rise 28% in 2014(theagriinfo.com, 28 December
2013). Such consumption is an indication of rising consumer incomes as milk
has not historically been a common consumer product there. Clearly, demand
for dairy products is stronger than supply.

Chinese consumers, recognizing a bargain when the Street saw none, bought
40% more Gold in 2013 than in the previous year(bloomberg.com, 9 March). Because
of higher prices, Chinese demand for Gold is expected to begin the year weak.
Note the wording carefully. Chinese are not selling Gold, they just might buy
less than the 1,176 tons purchased last year. We also suspect they are not
buying NASDAQ fantasy stocks either. And which of those two are they likely
to buy in the future?

Demand for Gold and Agri-Commodities seems to be the dominant factor for prices
this year, even after taking into account unique supply situations in some
cases. As the year continues to unfold, investor attitudes on commodities,
and in particular Gold and Agri-Commodities, need to adapt to the reality of
the situation. Street fantasies, like those noted in the first paragraph, are
not likely to enhance your wealth. Have they ever?

Ned W. Schmidt,CFA is publisher of The
Agri-Food Value View, a monthly exploration of the Agri-Food Super
Cycle, and The Value View Gold Report,
a monthly analysis of the real alternative currency. To contract Ned or
to learn more, use either of these links: www.agrifoodvalueview.com or www.valueviewgoldreport.com

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and
author of "$1,265 GOLD", published in 2003. A weekly message, TRADING
THOUGHTS, is also available to electronic subscribers. You can obtain
a copy of the last issue of THE VALUE VIEW GOLD REPORT at The
Value View Gold Report. Ned welcomes your comments and questions, and
tries to answer most all. His mission in life is to rescue investors from
the abyss of financial assets and the coming collapse of the U.S. dollar.
He can be contacted at ned@valueviewgoldreport.com